Investing in Innovation: Financial Services

Key trends in digital payments

Increasingly, we are seeing payments integrated with customer engagement and business management software. Merchants are looking to derive important insights from their payment data and potentially drive sales by using that data to create highly targeted marketing campaigns. Payment providers are looking to provide software and analytics using payment data in order to increase its value and raise switching costs. Payments are becoming a software business, and that threatens hardware providers, as hardware-based solutions are usually low-value and have low switching costs. For example, Square now provides business software to customers. Apple Pay has taken a different approach to payments. While Apple Pay may never garner a significant percentage of transactions, Apple (AAPL US) has an enormous installed base of smartphone users. Apple is trying to provide its users another service in order to raise switching costs and prevent users from adopting competing smartphones.

Most important innovations happening within financial exchanges

Intercontinental Exchange's (ICE) attempt to provide a centralized order book for bond trading could be significant. Currently, bond trading is a resource-intensive, highly manual process. As price data for less-frequently-traded bonds improves, it could enable an exchange to automate much of the process for bond trading and potentially result in greater liquidity and lower transaction costs.

Potential for cryptocurrencies and Blockchain technology

Blockchain has exceptional potential to disrupt industries through decentralization. Though we will remind investors that the technology is in its infancy and currently has considerable issues with scalability, these technologies could provide alternative avenues to exchange data. Any business process where the main function is to exchange and transfer information could potentially be threatened. For example, trading securities on an exchange is mostly a process of recording and transfer of financial data. Payment is another example of a business process that could be disintermediated.

Biggest beneficiaries of Financial Services sector and beyond

Currently, PayPal (PYPL US) and ICE (ICE US) are capitalizing on the trends in payments and data to drive sales. In PayPal‟s case, they have been increasingly successful in becoming the digital wallet of choice for online shoppers. By targeting customers at the beginning of their journey as consumers, PayPal has the ability to become the go-to payment option for online consumers.